Results

Below Expectation: 9MFY14 Core profit made up of 66% of HLIB and consensus full-year estimates, respectively.

Deviations

Due to lower margin from Offshore construction and subsea services (OCSS) and fabrication division.

Highlights

For 3Q, revenue rose 8% YoY due to the inclusion of financial results from Seadrill tender rig business subsequent to completion of acquisition on 30 April 2013 and offset by lower contribution from Offshore construction and subsea services, FAB and HUC division. OCSS segment fell 10% yoy mainly due lower revenue recognised on Domgas project. FAB & HUC revenue fell by 32% yoy mainly due to lower contribution from certain projects which are nearing completion stage. Fabrication job expects to see increasing activities toward year end.

PBT margin for FAB & HUC has fallen from 15% in 3Q13 to 13% in 3Q14 partly due to increase competition from local and foreign players. In mid to long term, more value add services will be introduced with increasing yard automation to help maintain the margin.

We believe the recent acquisition of Newfield’s asset will help SapuraKencana to diversify its portfolio of business and gain immediate foothold and recognition as an upstream resource owner and operator. The acquisition value of US$898m translates to US$25/boe of 2P reserves versus recent international transaction range of US$15/boe to US$32/boe. To note, there will be upside to the current 2P reserves of 36m given the huge estimation of GIIP for SK310 and SK408 gas fields. We expect this acquisition to be earning accretive and will increase our FY15 earnings forecast by 22% based on existing oil fields. To note, the new gas fields would only start production in 2016 and 2017 with significant development cost of around US$727m over 2-5 years in order to monetise the asset.

Risks

Execution risk, escalation of vessel and fabrication costs.

Forecasts

FY14 earnings reduced by 12% due to lower margin from fabrication and OCSS division, but we maintained our FY15 and FY16 forecasts pending completion of Newfield’s deal.

Rating

BUY

Positives – Strong balance sheet and knowhow, global trend towards offshore production.

Negatives – Increased competition for growth markets, complexities of running a larger organization.

Valuation

Maintain BUY call with an unchanged TP of RM4.74 based on 20x FY01/15 EPS of 23.7 sen/share given potential earnings upside from the acquisition of Newfield’s asset in Malaysia. Although 3QFY13 results were disappointing, we remained very positive about its future earnings growth, especially with the earnings accretive Newfield acquisition which will further enhance the already robust growth from existing businesses.

Source: Hong Leong Investment Bank Research - 9 Dec 2013